4 Things That Could Prevent the S&P 500 From Reaching 2,100

Good news for investors desperately looking for a bullish call from the pros (in order to justify a renewed stock-buying binge) —  Goldman Sachs released on outlook on Monday that effectively calls for the S&P 500 to gain 7% from where it was trading on Monday.

4 Things That Could Prevent the S&P 500 From Reaching 2100No, you didn’t read that wrong.

Goldman Sachs expects the S&P 500 to do something over the course of the last three months of this year that it’s only done about 36% of the time in the past 50 years, only done three times in the latter phase of a bull market and only done twice in recent history when it was as near its current sky-high valuation.

Goldman Sachs Said What?

The bullish outlook came as part of the investment banks weekly “Kickstart” note, explaining, “The no-hike decision eased financial conditions and supports S&P 500 rising to 2,100 by year-end.”

That’s about 7% higher than where the index was trading on the first day of this week.

The premise is, of course, that cheaper/easier money is what American corporations, as well as American investors, wanted — and now that they have it, they’re going to spend, spend and spend some more, sharing the wealth.

And truth be told, there’s some reason for the optimism. The end of the year is generally a bullish one, and in the shadow of the second quarter’s likely GDP growth rate of 3.7% thus far, we’re arguably hitting the ground running headed into 2015’s home stretch.

On the flipside, considering the average fourth-quarter gain for the S&P 500 is only 3.64% and that we’re still — even with the recent market stumble — closer to multiyear highs than we are to multimonth lows, it’s tough to imagine stocks pulling off that particularly mini-miracle.

In fact, there are three specific reasons why the S&P 500 is going to have a very tough time reaching 2,100 by Dec. 31.

4 Things That Could Prevent the S&P 500 From Reaching 2,100

Before investors blindly accept whatever Goldman Sachs says as an irrefutable, unflappable truth, they may want to ask themselves (or ask Goldman Sachs) how these four realities fit into the picture.

Earnings: To the extent that investors care anymore, the S&P 500 is expected to see earnings fall 2.9% on a year-over -year basis for Q3 following a 10.9% tumble in the second quarter. (FactSet has that number even higher, at a fall of 4.4%.) Yes, the energy sector gets a lot of the blame, but not that much. Even taking the energy sector out of the equation altogether, the average earnings gain for the other nine sectors is only 5% for Q3.

Perhaps even more insane, analysts are currently calling for earnings growth of nearly 15% in Q4 without energy in the mix, and are still calling for earnings growth of 8% with oil and gas stocks factored in.

The bulls will argue that the year-ago comparison was especially weak for Q4, making the growth numbers exaggerated this time around. And to be fair, the third-quarter numbers will have completed the four-quarter cycle of oil-driven lackluster earnings for the broad market.

But still, almost 15% growth without energy stocks dragging the market’s overall earnings down? What’s changed that dramatically in the meantime, and what could realistically change between now and then?

Valuation: Perhaps it should be an extension of the “earnings” concern, or perhaps not. Either way, Goldman Sachs has yet to reasonably justify what will be — if the S&P 500 reaches or exceeds 2,100 by year-end — what will be a trailing P/E of 18.8 and a forward-looking P/E of 16.2. The best trailing P/E the index was able to muster in July was around 18.3, and that one didn’t last long at all.

Rising Interest Rates: Yes, the Federal Reserve held off on pushing interest rates higher. It’s not going to do so forever, however, and it’s almost a given that the federal funds rate will rise in December. If static interest rates are indeed good for the market while rising rates work against the market — in that investors aren’t stupid — the closer we get to that D-Day, the more investors will be inclined to sell rather than buy.

Another government shutdown: Truth be told, there’s more economic bark than bite to them, but with political tensions high as we head into a presidential election year, don’t be surprised to see yet another partisan budget showdown in Washington to prompt yet another government shutdown. The market isn’t a fan of these games, silly and meaningless as they may be.

Bottom Line

Again, nothing can be ruled out. But — and this is being said with the utmost respect to David Kostin and Goldman Sachs — there’s a lot of data that didn’t seem to considered in this morning’s bullish call on the S&P 500.

As you have to know, however, the market’s earnings and its valuation are a ticking time-bomb that’s going to explode sooner or later … and I’m leaning toward sooner.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/4-things-prevent-sp-500-reaching/.

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